[Anonymous]

Can anyone explain to me how to do the JEs for paying off withdrawing partners under the Goodwill Method? I am doing this SIM in Becker. They do not require you to do the JE, but there wasn’t an example in the book, and I am a little confused on how to do it… and numbers in a real example help me retain… any help is very welcome!

Becker lists this as the journal entry and has it starred…

Record goodwill to make withdrawing partner’s capital account equal payoff:
DR: Goodwill
CR: A, Capital (%)
CR: B, Capital (%)
CR: X, Capital (%)

Is the goodwill the plug figure? Because you would put the amount to get X to his $26,500,000 payoff amount as the third credit… then from there I’m very lost. Haha, sorry, this is probably super easy, but I am very burnt out and am not thinking straight!

BELOW, is the actual problem. Thanks in advance to anyone patient enough to read this/do it. Haha.

On January 1, Year 1, Johnson (J), Smith (S), and Henry (H) formed a legal services partnership. Initially, J contributed $12,000,000, S contributed $18,000,000, and H contributed $30,000,000 for a partnership profit and loss sharing ratio of 20%, 30%, and 50%, respectively. As part of the original partnership agreement, the partnership will pay H an annual salary of $100,000 for overseeing daily business activity. In addition, the partners agreed H should receive a 10% guaranteed bonus of any partnership profits prior to distributing any earnings to the individual partners. The partnership will pay interest of 2% on the partners’ capital balances at each fiscal year end. The salary, guaranteed bonus, interest and profits are distributed to the partners and not reinvested in the partnership. The partnership generated net profit of $4,000,000 during its first year of operations.

At the beginning of Year 2 the partnership admitted Cunningham (C) as an additional partner. As part of the agreement, Cunningham provided a capital contribution of $20,000,000 in return for a 20% partnership interest.

In the third quarter of Year 2, S decided to withdraw from the partnership. The partnership determined that the fair value of the partnership’s assets was $110,000,000 and the adjusted profit/ loss ratios for J, S, H, and C were now 15%, 25%, 40%, and 20%, respectively.